The Impact of Financial Reporting Enforcement and IFRS Adoption on Executive Compensation

This study examines whether both IFRS adoption and the level of financial reporting enforcement impact the contractual usefulness of financial statements, as reflected in payperformance sensitivity. Using a sample of 8,440 executive year observations from 522 firms in 16 European countries we find that when earnings are based on local GAAP, the payperformance sensitivity is positive and significant only when the level of enforcement is high. When earnings are based on IFRS, we find that the pay‐performance sensitivity is (equally) positive and significant across different levels of enforcement. This suggests that the impact of enforcement on pay‐performance sensitivity vanishes after the implementation of IFRS. These results indicate that IFRS dominate enforcement when it comes to the contractual usefulness of financial statements. The findings should be of interest to both enforcement authorities and accounting standard setters.